Page images
PDF
EPUB

Since a partnership stands ambiguously before the law in other fields, it is not disturbing that it should be found so under the income tax statute. So it has been for many years, S. O. 42, 3 C. B. (1920) 61, without the suggestion heretofore of difficulty to either the Bureau or the taxpayers. The logical conflict seems thus far to have had no untoward result, and no reason is shown why the "page of history" should now be torn out. New York Trust Co. v. Eisner, 256 U. S. 345. However the proposition might have been treated at the threshold of income taxation in 1913, a change now in the long established practice should be prompted by important practical considerations and not merely by a desire for logical harmony.

But if we felt entirely at liberty to consider the contention apart from its history, we would find it unconvincing. That the contribution of individual property to a newly organized partnership operates to shift its title from the individual and to change the nature of his interest is clear. Cf. Pharos-Reporter Publishing Co., 1 B. T. A. 879. But it does not follow that such change is itself the realization of gain or loss. Cf. L. O. 816, 1 C. B. (1919) 168. On the contrary, the investment is now more fettered than before, as it is bound with others in the joint enterprise. Although a transformation in title has occured, there has been no exchange of property for other and different property, but only a further venturing of the old investment in a new project with the hope of added income in the future. Cf. Blodgett v. Silberman, 277 U. S. 1, 10. Unlike corporate shares received in exchange for the subscription price in property, the new partnership interest may not be separately disposed of without destroying the partnership. Harris v. Commissioner, 39 Fed. (2d) 546. To this extent the partnership and the partner are identical, and a corporation and its shareholders are not. And even in respect of the corporation, when shares are not issued for the property contributed, as in the case of a contribution of property by an existing shareholder by way of paid-in surplus, it is not held that the increment reflected in the increased value of the shares is income before it is more definitively realized by sale or liquidation of the shares.

Finding ourselves unconvinced either by G. C. M. 10092 or by the argument here, we hold that the change now being made by the Commissioner in the long established rule is contrary to law, and his determination is therefore reversed.

Reviewed by the Board.

LOVE dissents.

Judgment will be entered under Rule 50.

FARLEY HOPKINS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 52330. Promulgated February 28, 1933.

1. Securities were distributed in 1926 to petitioner as remainderman under testamentary trusts created in 1915. Held that the date of testator's death is the time of acquisition of the securities by petitioner and value at that date is the basis for determining gain or loss on the sale in 1927. Chandler v. Field, 58 Fed. (2d) 370, followed.

2. Dividends declared and payable in 1927, checks for which were mailed in that year and received by petitioner in 1928, were properly included by respondent in 1927 income. Mary Miller Braxton, 22 B. T. A. 128, followed.

Herbert Pope, Esq., and Preston B. Kavanaugh, Esq., for the petitioner.

C. A. Gwinn, Esq., for the respondent.

OPINION.

ARUNDELL: The respondent determined a deficiency in income tax for the year 1927 in the amount of $39,239.39, all of which is here in controversy. The major issue involves the basis for gain or loss on the sale of stocks and bonds distributed to petitioner as remainderman under his grandfather's will. The facts were stipulated and we adopt, by reference, the stipulation as our findings of fact.

Petitioner's grandfather died testate on December 13, 1915. Under the will the residuary estate was left to trustees to invest and to pay one-half the income to the testator's wife (grandmother of the petitioner) for life, and the other half to his daughter (mother of the petitioner) during her life. Upon the death of either the grandmother or mother her share of the income was to be divided equally between petitioner and his brother, but they were to receive none of such income unless and until they respectively reached the age of twenty-five years. The trust property was to go to petitioner and his brother when they respectively attained the age of thirty years or as soon thereafter as the death of the mother and grandmother occurred, such distribution to be made one-fourth to each of the remaindermen upon the death of each of the life tenants, provided he had then reached the specified age. Petitioner's mother died in 1923. Petitioner was thirty years old on February 9, 1926, and on that date the trustees distributed to him certain stock representing his one-quarter of the principal of the trust. The grandmother died on September 10, 1926, and on

that date the trustees distributed to petitioner his remaining onefourth of the trust property.

In 1927 petitioner sold certain of the securities so distributed to him in 1926, and in his income tax return he used as a basis for determining gain or loss the value of the securities when received by him (except as to a block of Camel Company stock and the value of that has been stipulated).

Of the securities sold in 1927, one block of stock-the Camel Company stock-formed part of the estate of petitioner's grandfather at his death in 1915. As to that stock respondent held that the basis was the value at the date of the grandfather's death. The remainder of the securities sold in 1927 represented investments made by the trustees under the will. The respondent used as a basis for computing gain on the sale of these securities the cost thereof to the trustees.

Petitioner's assignments of error and argument under the first issue are directed entirely to the claim that value at the date of distribution in 1926 is the proper basis for determining gain or loss. At one point in the argument it is faintly suggested that petitioner's remainder interest was contingent during the existence of the life tenancies, but counsel for petitioner further state that in their opinion the character of the remainder is not decisive of the question before us. If this question is material our construction of the will is that it operated to vest the remainders at the time of the testator's death. See Hoblit v. Howser, 338 Ill. 328; 170 N. E. 257; Isabel R. Molter, 27 B. T. A. 442, and cases cited therein. Under the decided cases it must be held that the basic date; i. e., date of acquisition by petitioner, was the date of the testator's death. Rodman E. Griscom, 22 B. T. A. 979; William Huggett, 24 B. T. A. 669; Chandler v. Field, 58 Fed. (2d) 370; affd., 63 Fed. (2d) 13; Isabel R. Molter, supra. No question is raised as to the propriety of respondent's use of the value of the stock comprising the testator's estate at the date of death as distinguished from the value of petitioner's interest therein, nor as to his use of cost of the stock purchased by the trustees, and we do not pass upon these matters.

The remaining issue is whether the respondent correctly included in 1927 income certain dividends which were reported by petitioner as income received in 1928. These dividends-$38,250 from the Camel Company, $187.50 from each the American Radiator Company and the Youngstown Sheet and Tube Company-it is stipulated "were declared in 1927 and were payable December 31, 1927. The checks in payment of these dividends were mailed in 1927 and they were received by petitioner in January, 1928." Petitioner's income tax

return for 1927 was made on the cash receipts and disbursements basis.

The facts under this issue are on all fours with those in Mary Miller Braxton, 22 B. T. A. 128, in which we held that the dividends should be included in income for 1927, the year in which they were declared and payable. See also Commissioner v. Bingham, 35 Fed. (2d) 503; Effie B. Shearman, 26 B. T. A. 716.

We accordingly sustain the respondent on both issues, and

Decision will be entered for respondent.

H. AND L. EPSTEIN, INC., PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ARMY AND NAVY STORE TRUST, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

H. AND L. EPSTEIN, INC., AND ARMY AND NAVY STORE TRUST, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 44267-44269. Promulgated February 28, 1933.

Bernard Greensfelder, Esq., for the petitioners.

J. H. Pigg, Esq., for the respondent.

OPINION.

LEECH: These three proceedings, consolidated for hearing and decision, are appeals from deficiencies in income taxes asserted against the Army and Navy Store Trust for the period January 1 to February 5, 1924, in the sum of $140.27, for the period February 6 to December 31, 1924, in the sum of $1,334.72, and from a deficiency asserted against H. and L. Epstein, Inc., for the calendar year 1924 in the sum of $417.96. The errors assigned are the same in each proceeding, these being the disallowance by respondent of the respective taxpayers' claims of affiliation for all of the calendar year 1924 with the H. and L. Epstein Trust Estate.

The facts are all formally stipulated by the parties and the stipulation filed is incorporated herein by reference as our findings of fact. Briefly stated, the facts are that the petitioner, H. and L. Epstein, Inc., is a Missouri corporation which acquired on organization in 1922 a supply house in St. Louis, Missouri, and two chains of retail stores. The stock of this petitioner has at all times been owned by the same. seven individuals.

Shortly after its organization and in the same year this petitioner caused to be created two "Massachusetts trusts", each with 500

shares or beneficial interests, known as the Army and Navy Store Trust and H. and L. Epstein Trust Estate. To each of these trusts it conveyed one of the chains of stores referred to in consideration of the issue to it of all of the shares of or beneficial interests in such trust. Thereafter these trusts owned and operated these stores. The petitioner, H. and L. Epstein, Inc., continued to own all of the shares or beneficial interests in the two trusts mentioned, with the exception of 30 shares of the petitioner Army and Navy Store Trust which it sold to one Hill and 30 shares of the H. and L. Epstein Estate which it sold to one Ragan. Both of these individuals were store managers and both sales of stock were made prior to 1924. On February 5, 1924, H. and L. Epstein, Inc., reacquired from Hill the shares sold him and on December 30, 1924, reacquired the shares sold to Ragan. These reacquired shares were in each instance owned by this petitioner during the balance of the year 1924.

This corporate petitioner and the two trusts mentioned filed consolidated returns for the calendar year 1924, during which year the H. and L. Epstein Trust Estate had an operating loss. Respondent in determining the deficiencies here in question held that the corporation and the Army and Navy Store Trust were only affili ated in 1924 for the period of February 6 to December 31, inclusive, and that the H. and L. Epstein Trust Estate was not affiliated with either of the other two for any period during 1924. Respondent now admits that affiliation of the three organizations did exist for the one day, December 31, 1924, and that the deficiency should be recomputed with this adjustment.

Section 240 (c) of the Revenue Act of 1924, provides:

For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns at least 95 per centum of the voting stock of the other or others, or (2) if at least 95 per centum of the voting stock of two or more corporations is owned by the same interests. A corporation organized under the China Trade Act, 1922, shall not be deemed to be affiliated with any other corporation within the meaning of this section.

Petitioners contend that affiliation of the three organizations existed during all of the year 1924 because the stipulated facts show them all to have been owned during that period by the "same interests" within the purview of section 240 (c) above quoted. Several decisions of the courts and of the Board are cited in support of the contention that ownership of a small amount of stock by employees under conditions somewhat similar to those here existing constitutes holding by the "same interests." These decisions, however, were rendered prior to the decision by the Supreme Court in the case of Handy & Harman v. Burnet, 284 U. S. 136. It is shown that Hill, who owned 6 per cent of the shares of one trust here involved, and Ragan, who owned 6 per cent of the shares of the other trust, had

« PreviousContinue »